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Global Safe Retirement Withdrawal Rate

Steve LeCompte | | Posted in: Individual Investing, Strategic Allocation

Guide Asset Allocation and Portfolios Fixed and lazy portfolios

Key Insight

A 4% real withdrawal rate for a couple retiring at 65 with a 60% domestic stocks/40% bonds portfolio showed a 17.4% ruin probability using 38 developed countries versus 3.5% using U.S. data (international 1890-2019; U.S. 1926-2019; block bootstrap simulation).

Does a constant real annual withdrawal rate of 4% of household savings at retirement, derived from U.S. asset return experience, really protect against financial ruin? In their September 2022 paper entitled "The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets", Aizhan Anarkulova, Scott Cederburg, Michael O'Doherty and Richard Sias consider data from 38 developed countries to assess safe withdrawal rates. This sample mitigates survivorship/easy data biases of the U.S. experience by including multiple left-tail instances of trading halts, wars, hyperinflation and other extreme events. They use this data to model retirement portfolio performance via stationary block bootstrap simulation, with longevity risk incorporated from U.S. Social Security Administration mortality tables. Their base case examines joint investment-longevity outcomes for a couple retiring in 2022 at age 65 using a 60% domestic stocks-40% bonds (60-40) portfolio strategy. They also look at other fixed stocks-bonds allocations and investment strategies pursued by target-date funds. Using monthly (local) real returns for domestic stocks, international stocks, bonds and bills as available for 38 developed countries during 1890 through 2019, they find that:

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